MorningWord 9/11/13: The Cheap One is Usually Gold Plated $AAPL

by Dan September 11, 2013 9:30 am • Commentary

MorningWord 9/11/13:  And there you have it people, AAPL’s first iPhone release that is not “line worthy”, as in lines around the block on opening morning.  The iPhone 5S and 5C  are evolutionary and reactionary, the iOS 7 that the company has labeled as revolutionary is only so because their prior iOS that has not be changed in a substantial way since the iPhone’s introduction in 2007 was very tired. IN both the hardware and the software the company is playing catch up after having an early lead for years.

For the AAPL product faithful (I am one) the lack of innovation is nothing short of disappointing, and it kind of reminds me of my run with Motorola back in the late 90s into the early part of last decade.  After multiple versions of the StarTac, which was the gold-standard of  mobile phones in the 90s, many early adopters began to become bored with plastic clam-shell phone.

Motorola StarTac circa 1998
Motorola StarTac circa 1998

It wasn’t until 2004 when Motorola was dramatically losing on the innovation front (to NOK) in a market that they helped to create that they pulled one out of a hat with the RAZR, which was not only sleek, but defined the cellphone as not only a utility but a fashion accessory.

Motorola RAZR circa 2004
Motorola RAZR circa 2004

And as the phone took the world by storm, there was no meaningful innovation and eventually Blackberry moved into the consumer market with devices like the Pearl that made texting and push email ubiquitous and Motorola had no answer. And the rest is a fairly sad story that I will spare you.  But for those who watched closely I think it is safe to say that the intro of the blinged out Gold RAZR was likely the final nail in the coffin, when all else appears to be lost, try to attract the Real Housewives of New Jersey.

Moto RAZR Gold circa 2006
Moto RAZR Gold circa 2006

Well, I am not going to go as far to suggest that AAPL is going down the Moto path, but yesterday’s intro of the iPhone 5c (c for cheap) and the iPhone 5s (s for same) was not exactly an awe inspiring feat.  The mobile phone market the world over is maturing, saturated on the high end in the developed world, and trends that have been a slam dunk in North America and Europe are not guaranteed to work in markets like China where Madmen from NYC and designers from Cupertino may miss certain subtleties as it relates to consumer preferences.  This weekend in Barron’s cover story (Lenovo Attacks) there was  fascinating quote that speaks to U.S. consumer products company’s like AAPL possibly missing the mark in China, where the author reported on a seemingly hard-to-believe trend that “Chinese women prefer big phones, which make their faces look smaller and “more beautiful.” With a deep understanding of the local market and very flexible manufacturing capabilities and an inclination to operate at very slim profit margins, manufacturers like Lenovo may have a big leg up on the likes of AAPL in the region.

By no means am I trying to pile on AAPL here, with the stock down 4% in the pre-market, mostly on this news:

Apple did not announce a carriage deal with China Mobile overnight, as expected, but it’s said to have received a license that will allow the iPhone to run on China Mobile’s network.

But I have been fairly consistent on the matter that AAPL is losing in China.  Back on Aug 21st in this space (MorningWord 8/21/13: $AAPL Letter of the Day, C) I suggested:

For AAPL investors, China is likely to be as important as any hot new product for the developed world, as the company’s recent market share losses in China in both iPad and iPhone may speak to a very different retail opportunity than that in North America and Europe.  In just the last quarter, AAPL has seen a significant market share losses in China for both iPad and iPhone.  On the iPad front, IDC reports that in the quarter just ended, AAPL saw its tablet share drop from 49% to 28% as Samsung and other Asian oems make inroads.  As for iPhone, AAPL saw share drop year over year in the last quarter from 9% to 5% with Samsung owning the smartphone lead with ~18%

On Friday we laid out a hypothetical trade structure for those who had to be there for this week’s event (Name That Trade $AAPL: Hot Apple Fly), but concluded:

This is not a trade we’re putting on at this time. We’d love to see AAPL pull back a little bit before diving in.

Why the apprehension you may ask?? We like the story and frankly I would much rather own AAPL than the SPX, the stock is cheap has a ton of cash, monster share buyback, reasonable dividend yield, motivated activists, amazing cash flow generation (and the list goes on), but they are losing battles that seemed like easy pickings just a few years back in categories that they help create.  The company is not doing what they did so well under Steve Jobs over the last decade prior to his death.

Unfortunately AAPL is now a financial engineering story with one third of their market cap in cash, and the kicker to owning the stock at current levels will be the chance that they are able to pull one out of a hat once glare of the Gold iPhone 5S fades.  If the stock gets oversold in the very near term we would likely look to get long exposure in the stock heading into their Q4 results in late Oct as the next real catalyst for the stock is any progress towards earnings re-acceleration.